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FRM Part II · FRM Exam Part II · Advances in Artificial Intelligence: Implications for Capital Markets Activities

A bank's AI credit-scoring model for small-business lending shows materially lower approval rates for a protected group, although protected attributes are excluded from the inputs. Which explanation and response is most consistent with ethical AI governance?

Proxy variables correlated with protected attributes can create disparate impact even when those attributes are excluded. The bank should test outcomes by group, review and adjust features, and document remediation. Ignoring the gap, adding opacity or hiding it in aggregate reporting would violate sound governance.

  1. AExcluding protected attributes guarantees fairness, so the result must be statistical noise and can be ignored
  2. BProxy variables correlated with protected attributes may drive the outcome, so the bank should test for disparate impact, review features and document remediationCorrect
  3. CThe model should be made more complex so that its decisions are harder to trace to any group
  4. DApproval rates should be reported only in aggregate to avoid revealing the disparity

Explanation

Fairness through unawareness fails because other features can proxy for protected traits. Governance requires outcome testing, feature review and documented remediation. Obscuring decisions or aggregating reports hides rather than manages the issue.

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